09 October 2008

GM Slips Further

GM led the Dow lower, falling 31 percent to 4.76. This is its lowest level since December 1950. A year ago, General Motors stock was selling at a peak price of $39.19 a share. The price of a share of General Motors stock has decline about 88% since then.

In recent years, General Motors operations outside North America and financing operations have helped mute less profitable operations in the United States, but the spread of the financial crisis worldwide and GMs sale of a majority interest in GMAC threaten to upset the balance.

The stock market, generally, had another very bad day. The Dow fell 678.91, or 7.3 percent, to 8,579.19. The close below the 9,000 level was the first since Aug. 6, 2003. The close is more than two thousand points below where it was when President Bush took office. All indications are that the bailout bill that Congress passed has not established confidence in the stock markets.

General Motors' Falling Bond Rating

General Motors has a bond rating that was recently downgraded to CCC, deep in junk territory.

Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal.

Only bond ratings of CC and C are worse.

But, it looks like a lower rating may be in the cards:

Standard & Poor's Ratings Services put GM and its finance affiliate GMAC LLC under review to see if its rating should be cut. GM has been struggling with weak car sales in North America.

The action means there is a 50 percent chance that S&P will lower GM's and GMAC's ratings in the next three months.

S&P also put Ford Motor Co. on credit watch negative. The ratings agency said that GM and Ford have adequate liquidity now, but that could change in 2009.

From a practical perspective, the low stock price and bad credit rating combined, make it very hard for General Motors to raise new capital from the public.

The Weak General Motors Balance Sheet

The market capitalization of General Motors is now $2.69 billion and a book value of negative $57 billion. Book value has been negative since sometime in 2006. The Company has lost $62 billion over the last twelve months on sales of $171 billion.

At the end of the second quarter of 2008, GM had about $20 billion in cash, $35 billion in current assets like inventory and accounts receivable, $11 billion in financing and insurance operations assets (like its interest in GMAC), and $62 billion in non-current assets like plant and equipment, and $18 billion in pre-payments to the pension plan. The value of plant and equipment would probably plummet if GM failed, as it has few good alternative uses and the overall market for the vehicles that GM makes in those plants is in decline -- that is why General Motors is in trouble.

On the liability side, General Motors had $75 billion in short term liabilities (like accounts payable, short term loans and current portions of long term debt), $4 billion in debt and liabilities in connection with finance and insurance operations, $32 billion of long term debt, $47 billion of post-retirement obligations other than pensions, $12 billion of pension liabilities, and $21 billion of other long term liabilities.

What Would Happen If General Motors Went Bankrupt?

General creditors, like General Motors bondholders, would probably be lucky to get more than 50 cents on the dollar in a liquidation of the Company, although a sale of the Company to another automobile company, or reorganization combined with a government bailout, would improve this return.

It would be possible to buy all outstanding General Motors bonds and all of its outstanding stock for less than the federal government has spent on its second tranch of the AIG bailout.

Another plausible suitor in a General Motors sale or reorganization would be the union. Pension and post-retirement liabilities to employees of General Motors are the biggest liabilities on the books of the company. Trading those obligations for stock in the Company would be worth about a 95% equity stake in the company, and would also greatly improve the bond rating of General Motors in the credit market. Also, the nation's biggest employee owned company would make a much more attractive bailout beneficiary, if further government lending of assistance was needed, than a shareholder owned company.

A Chapter 11 reorganization would, ironically, make General Motors more creditworthy, even without government lending, because it would effectively turn existing bondholders and creditors into subordinated debt, since operational loans during a reorganization are considered administrative expenses entitled to priority payment in a banruptcy, and would wipe out existing shareholders.

PBGC Exposure If GM Fails

If General Motors were to enter bankruptcy, it would trigger a huge obligation on the part of the Pension Benefit Guarantee Corporation to cover the obligations of its defined benefit pension plan for its employees. It would also likely trigger defaults on the Delphi corporation defined benefit plan, a spun off automobile supplier, whose pension is supported by General Motors despite Delphi's bankruptcy.

The most recent available information indicates that the recent market crash has probably left the domestic pension plan somewhat underfunded on paper, and the plan for foreign employees doing much worse. The shortfall would likely be on the order of the single digit billions of dollars, or perhaps the low double digit billions of dollars.

Historically more than half of the GM pension plan has been invested in stocks.

This would probably be the biggest pension bailout in U.S. history, because of the overall size of the plan, because most of it is for rank and file employees who are entitled to maximum or near maximum protection from the PBGC, and because the bear stock market has very likely left the plan underfunded.

An August 2008 analysis of the PBGC situation stated:

Pension Benefit Guarantee Corporation: This government agency insures $2.5 trillion in Defined Benefit obligations. The PBGC covers 30,000 business plans and 44 million workers. The PBGC charges an insurance fee and has $55 billion in assets. Unfortunately, the Bush Administration wanted to give the stock market a boost and forced the PBGC to move from mostly safe bonds into 45 percent equity holdings, a move that occurred just before the stock market really headed down. The PBGC is already $14 billion under-funded, and that's before the recession smashes the stock value of their portfolio.

Other Impacts of a General Motors Bankruptcy

An actual liquidation of General Motors operations would also send every state and local government in the Rust Belt into a financial crisis as a result of declining tax revenues, and would put about 236,000 people out of work all at once, again, with a highly concentrated geographic impact.

A General Motors liquidation would deal a serious blow to Delphi, possibly forcing it from a reorganization to a liquidation, and would be many thousands of car dealers all across the country out of business. GMAC would also probably fall too fast to survive on its own and would probably have to be purchased by some other financing company.

UPDATE: This source says that GM bonds were trading at an effective yield of 50% as of yesterday, which implies an exceedingly high risk of a default losing a large percentage of bond value.

In the comments, I suggest that early 2009 would be a likely collapse date, unless an inability to issue commercial paper pushed the company's collapse close to November, 2008. Stock and bond price collapses, however, suggest that the process could move more quickly. Also, earlier this year, GM was trying to mortgage its Detroit headquarters to obtain operating cash, another bad sign.

Standard & Poor's downgraded the credit of both GM and Ford on Thursday, placing each of them on "credit watch negative." The ratings agency also downgraded the companies' financing arms — GMAC Financial Services and Ford Motor Credit Co. — with the same designation.

GM has a 49 percent ownership stake in GMAC; the remainder is owned by a group led by private investment firm Cerberus, which also owns a majority stake in Chrysler. . . .

The peak of GM's stock this year came on Feb. 1, at $28.98 per share. At the market close on Thursday, when the stock closed at $4.76, it was down more than 83 percent . . . Ford's stock has also experienced a similar decline: On May 1, its share price was at $8.48. On Thursday, its stock closed at $2.08 — down more than 75 percent. . . .

David Zoia, editorial director for WardsAuto.com . . . [says that] Even before the financial crisis hit, the companies were "burning through close to $1 billion a month in cash." Now both companies are on a mission to build a "cash cushion" to allow them to survive.

There are also reports in the industry that GM may be exploring the idea of selling its world headquarters and leasing it back to generate more cash, something car companies have done in the past. . . .

Annette Sykora, chairwoman of the National Automobile Dealers Association, said in a speech in Detroit that "we're likely to lose up to 700 dealerships" in 2008. So far, 590 have closed this year. In 2007, there were 430 net closures, up from 295 in 2006. . . .

[M]ore than 90 percent of all vehicle purchases are financed through credit. The difficulty of securing loans has translated into "some of the lowest sales in 25 years for many of the manufacturers," . . .

Although GM still remains No. 1 in terms of sales of light vehicles (cars, pickups and SUVs), its market share has slipped 17.8 percent overall, to 22.5 percent, for the period from January through September, compared with 23.9 percent for the same months last year . . . Ford's market share also slipped 17.2 percent, to 14.5 percent of the total U.S. automobile market, from 15.3 percent.

Just when General Motors seems to be headlong on the death watch for dying car companies, Ford rushes to catch up with it. Also, a look at the Yahoo bond quote service did not corroborate my first update's source regarding GM bond prices. It indicates that they are trading at effective yields of just under ten percent. I don't know if this is accurate or not. Bond market public information sources are not as well developed as stock market public information sources.

5 comments:

GM is losing money at a rate of $5 billion a month. It had $20 billion in cash at the end of the last quarter. This and the Kremlinology from S&P would suggest early 2009, since typically, businesses continue business as usual until the day they can't make payroll, whether or not it makes economic sense.

Of course, if sales turn around and it stops losing money, all that changes. The 10-K filed for the Third Quarter of 2008 should provide much more clarity.

The wild card is the $8 billion of outstanding commercial paper that GM has in its current assets. If it has trouble continuing to refinance that in the current environment, that could cost it a couple of months, and put the day of reckoning at late November.

Generally, management acts before they can't make payroll around the time that their stock drops below $1 per share, while trying to put a good PR face on things until then. So, a continued lack of confidence from the market could produce a quicker collapse.

Still, there is no doubt that GM has risen to the top of the industry death watch list at this point.

Andrew, your article on GM was extremely useful, your analysis was dead-on target. I am a current GM bondholder (XGM), what do you think would happen to their value if GM were to go bankrupt...in your article you mentioned liquidation value of 50 cents on the dollar, is this still in ballpark?